Historically Low Data Sends Rates Lower

Weak data spurs rates rally. Rates rallied significantly today, a much-awaited break from the past few weeks of significant selling-off. Weak data both overseas and domestic, including historically low mortgage applications, were the main drivers of the move, which saw rates lower from the open. The 2-year and 10-year UST yields fell 8bps to 4.97% and 13bps to 4.19%, respectfully. The 10-year yield has now declined ~6bps on the week, though it remains near historically high levels.

Mortgage applications data and payrolls revision sends deflationary signals. Mortgage applications declined by 4.2% for the week ending August 18th to a nearly three-decade low, indicating higher borrowing costs are having an impact on housing demand despite the usual seasonal uptick in home purchases during the summer months. 30-year fixed rates were ~7.5% as of yesterday. The Bureau of Labor Statistics also issued their preliminary payrolls growth revision for the period March 2022 – March 2023, which is expected to show 306,000 less new payrolls than previously reported. The revision doesn’t change the reality of a strong labor market, but its strength may have been overstated in prior months. The final revision figures will be released early next year.

Short squeezes in Treasurys could begin to emerge. The ever-so-popular “higher for longer” narrative has resulted in a significant ramp-up in bearish bets on Treasurys, which could subject the bond market to a short squeeze. Citigroup strategists Bill O’Donnell, Ed Acton, and David Bieber noted that the market is currently “short across all time horizons in both USTs and EGBs”, with “large shorts held in fast 1-month positions.”